NYC Actuary Recommends Lowered Return Rate for Pensions

Robert North, New York’s chief actuary, is recommending that the city’s schemes lower its assumed annual rate of return on assets to 7% from 8%. 

(January 12, 2012) -- New York City has been told to reduce its assumed rate or return on its assets by a percentage point by its head actuary.

The city's actuary Robert North is recommending that the city's pension plans reduce its assumed annual rate of return on assets to 7% from 8%. The reduced expectations would open a funding gap of at least $2 billion next year, people familiar with the proposal told Bloomberg. According to the news service, North is revealing his plans to overseers of funds for police, firefighters, teachers, civilian employees and school administrators.

New York City's pension plans are not the only schemes to face resistance and concerns over its projected returns. New York State’s pension system lowered its rate from 8% to 7.5% in 2010; the Illinois State Employees’ Retirement System made a similar cut, from 8.5% to 7.75%. In September of last year, Joe Dear, the investment chief of the California Public Employees’ Retirement System (CalPERS), expressed that a 7.75% return may be tough to meet. In an interview with aiCIO featured in its Summer Issue, Dear commented on the fund's stellar returns, lowering expectations of future similarly stellar performance by saying: "Honestly, and not taking anything away from the team here, our 20.7% returns in fiscal 2011 were largely the result of market beta. Public equities are about half our $234 billion portfolio, and it is no secret that public equities significantly increased in value over the past year."

Summarizing his perspective on CalPERS' 2011 investment return and his future outlook, Dear told aiCIO: "Obviously, a 20% return undermines the statements of public pension fund critics—that we are unable to reach our target. I think that’s important—that there is still a lot of earning power in these assets—but let’s be clear: There won’t be a string of 20% years in a row."

In March 2010, CalPERS revealed plans to make a recommendation to its board on whether to lower its actuarial rate of return. Since 2003, CalPERS has assumed its fund, the value of its stocks, bonds and other holdings, would earn an average annual rate of 7.75%. But, following heavy losses during the financial crisis, the $200 billion fund began to assess whether to lower its long-standing rate. Lower investment return expectations would also decrease the likelihood that the fund would invest in more risky nontraditional investments, such as real-estate and private-equity, which contributed to the fund's losses. In the end, however, a CalPERS panel voted to keep the system's assumed rate of return at 7.75%.

Blackrock’s chief executive Laurence Fink told the board of CalPERS in July 2009 that the assumed rate of return on its investment was unrealistic. Fink said the fund should expect smaller gains, telling CalPERS board members that it would be lucky to get 5% or 6% return on its portfolio.

Meanwhile, in March 2011,  two reports – one a primer for new pension trustees, the other detailing different return scenarios – issued by consultants regarding the State of Florida’s pension system highlighted what increasingly is becoming a national issue: the effect of discount rates on pension liabilities.

Milliman and Hewitt EnnisKnupp, reporting to the Governor and State Board of Administration (SBA), respectively, both raise the issue of discount rates’ effects on pension liabilities. The state currently uses a 7.75% figure; according to the Milliman report – entitled “Study Reflecting the Impact to the Florida Retirement System of Changing the Investment Return Assumption to One of the Following: 7.5%, 7.0%, 6.0%, 5.0%, 4.0% or 3%” – lowering this figure would increase the pension obligation of the State’s fund.